Choices of Deficit Financing, Saving-Investment Gap and Inflation Nexus: Evidence from Pakistan

Abstract

The study is the analysis of possible consequences of various financing options at a disaggregated level on macroeconomic variables like the savings-investment gap and the general price level to choose a less-lethal financing option. Financing from domestic sources causes an increase in the general price level except for National Saving Schemes (NSSs) and crowding out of private sector credit and investment but external financing and deficit-financed by bonds appeared free from such costs. The government of Pakistan restricts printing of money to control the rate of inflation and may improve bonds and floating debt management to avoid crowding out effect. The study suggests bonds financing or external financing as compared to any other source because domestic financing is more distortionary as compared to external financing. Therefore, the study favors external financing because it appeared non-inflationary, satisfy the savings-investment gap, overcome the issue of crowding out, and bonds financing.